Missing Pieces: Microfinance and Profits, Colonialism’s Effects, and More

Hemalatha (C) and other loan borrowers show pass books given to them by a micro finance company at Ibrahimpatnam, on outskirts of the southern Indian city of Hyderabad, May 19, 2011 (Krishnendu Halder/Courtesy Reuters).

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In this installment of Missing Pieces, Charles Landow reviews two scholarly papers, an op-ed, and an index. Enjoy!

Microfinance and Profits: Are for-profit microfinance institutions (MFIs) good for the poor? The question has sparked intense debate in recent years. An article in World Development weighs in by examining the relationship between MFIs’ “profit orientation” and the interest rates they charge. It finds that MFIs with strong for-profit characteristics (such as formal for-profit status and board members with banking expertise) charge higher rates. Moreover, these MFIs have “significantly higher” costs, including operating expenses and losses from bad loans. There is thus “absolutely no evidence” that a for-profit stance brings greater efficiency. Why, then, do MFIs operate as for-profit entities? The author posits that their owners are not greedy, but instead that “MFIs that project a more business-like orientation” can better attract capital to grow.

Colonialism’s Effects: In a working paper from the National Bureau of Economic Research, two scholars consider colonialism’s long-term effects in Africa. They divide countries into three groups: “those with a centralized state” before the age of colonization, those where whites settled extensively, and all others. In the first group, which includes such countries as Botswana, Ghana, and Rwanda, colonialism clearly impaired development. Europeans provided few “public goods” while paving the way for political unrest or worse. The record is also negative for the second group. In Zimbabwe, for example, “the extractive nature of colonial rule and mass expropriation of land” left Africans impoverished and society highly unequal. In the third group—Sierra Leone, say—Europeans delivered some “clear benefits” but probably did not help the country overall. As the authors conclude, colonialism brought some good things, but these proved “ephemeral” while the downsides generally “endured.”

Wobbly BRICs: CFR’s Sebastian Mallaby questions the BRICs’ economic approach in the Financial Times. “Macroeconomic management remains credible,” he writes. But many specific actions have proved harmful. Brazil’s “blizzard of micro meddling has damaged business confidence,” including in the crucial oil sector. In Russia and China, corruption and dominant state firms have constrained the economy. Corruption and “dysfunctional regulation” strangle India as well. Overall, Mallaby writes, “the business climate in the BRICs is unreliable.” Lower growth is the result. Ruchir Sharma makes a related argument in the current Foreign Affairs, contending that the BRICs’ upward trajectory will be bumpier than recent banner years suggest.

Corruption Scores: Transparency International (TI) released its 2012 Corruption Perceptions Index, which gauges perceived graft in countries’ public sectors. The rankings are not a shock. Afghanistan, North Korea, and Somalia are tied for last, with Sudan and Myanmar only marginally less corrupt. Denmark, Finland, and New Zealand tie for the top spot, followed by Sweden and Singapore. According to TI, “Latin America as a region is doing worse than the global average,” with two-thirds of its countries ranking below the middle of the index. An NPR blog post notes that the Middle East is largely lagging as well. Egypt, Syria, Tunisia, and Morocco all fell in the index this year; Libya gained eight spots, but only to 160th of 176. CFR’s John Campbell also considers the results on his blog, noting that Africa’s best performers tend to be small.

Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions.

Indian writer and political activist Arundhati Roy once likened debating the pros and cons of colonialism to “debating the pros and cons of rape”. But, as the Republican Party in the US has repeatedly told us, there are different kinds of rape!
Likewise the differing impact of colonialism on Africa and India. Some, not least John Stuart Mill, described British rule in India as “benign colonialism”, particularly with respect to the ranks of English-speaking babus or bureaucrats created by the British. Niall Ferguson and others whitewash colonialism as generally a good thing and guilty mainly of “sins of omission”.
It would be wise to be careful about this. As the National Bureau of Economic Research paper is quoted to say, colonialism brought some good things, but these proved “ephemeral” while the downsides generally “endured.”

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